Office of the Attorney General
State of Texas

Honorald Chris Victor Semos
Chairman
House Committee on Business and Industry
Capitol Building
Austin, Texas 78711

Opinion No. MW-430

Re: Whether hospital project is subject to ad valorem tax

Dear Representative Semos:

The Grand Prairie Community Hospital, a hospital authority
organized under article 4437e, V.T.C.S., the Hospital Authority
Act, plans to construct a hospital project consisting of an
office building and parking lot immediately adjacent to the
presently existing hospital facility and to lease or sell that
office space as condominiums to doctors practicing therein. You
ask whether the project will be subject to ad valorem taxation
levied against the hospital authority if the revenue which it
generates through rental or sale agreements is sufficient to show
a profit, even though such profit will either be placed in the
general funds of the hospital authority or be used for the
continued improvement, expansion and development of the office
building. We do not understand you to be asking whether a lessee
or a purchaser will be subject to ad valorem taxation in the
situation you describe.

The hospital authority is empowered to construct hospital
projects defined as follows:

'Hospital project' means and includes any real, personal, or
mixed property, or any interest therein, the . . . constructing .
. . of which is found by the governing body of an issuer to be
required or necessary for medical care, research, training, and
teaching, any one or all. . . . Without limiting the generality
of the foregoing, and when found by the governing body of an
issuer to be so required, necessary, or convenient 'hospital
project' shall include the following:

. . .

(4) any structure suitable for use as a support facility
related to a hospital project such as an office building, parking
lot or building, or maintenance, safety, or utility facility, and
related equipment.

V.T.C.S. art. 4437e-2 s 3(g). See also V.T.C.S. art. 4437e, ss
1, 3, 6. Clearly an office building and parking lot such as you
describe, when found to be 'required, necessary, or convenient'
by the governing body of the authority would fall within the
definition of 'hospital project' as set out above.

Senate Bill No. 1067, amending article 4437e-1, V.T.C.S.,
authorizes the governing body of any hospital authority created
pursuant to the Hospital Authority Act to lease or to sell to any
person any hospital, or part thereof, owned by the authority.
Acts 1981, 67th Leg., ch. 583, s 5 at 2363. It amends section 14
of the Hospital Authority Act to provide that the hospital should
not be operated with a view to generating a private profit, but
that, in any event, it must be operated to generate sufficient
revenue to pay all expenses and all indebtedness incurred by the
facility. Acts 1981, 67th Leg., ch. 583, s 4 at 2362. And
finally, section 16 of article 4437e, V.T.C.S., provides that
since the property owned by the authority will be held for public
purposes only and will be devoted exclusively to the use and
benefit of the public, it shall be exempt from all forms of
taxation. You ask whether the authority will be subject to ad
valorem taxation if it leases or sells the above-described office
space and parking lot as it is empowered by statute to do.

Article XI, section 9 of the Texas Constitution provides in
pertinent part the following:

The property of counties, cities and towns, owned and held
only for public purposes, such as public buildings and the sites
therefor, . . . and all other property devoted exclusively to the
use and benefit of the public shall be exempt from . . .
taxation. . . .

Article VIII, section 2 of the Texas Constitution provides in
pertinent part the following: '[T]he Legislature may, by general
laws, exempt from taxation public property used for public
purposes. . . .' Article VIII, section 1 of the Texas
Constitution sets forth the following in pertinent part: 'All
real property and tangible personal property in this state,
whether owned by natural persons or corporations, other than
municipal, shall be taxed in proportion to its value, which shall
be ascertained as may be provided by law.'

Property of a political subdivision which would otherwise
qualify for exemption from ad valorem taxation under one of the
foregoing constitutional provisions will not lose its tax-exempt
status merely because a charge is made for use of the property or
a profit is generated thereby provided the charges are incident
to its use by the public and the proceeds inure to the benefit of
the political subdivision. Lower Colorado River Authority v.
Chemical Bank and Trust Company, 190 S.W.2d 48, 50 (Tex. 1945); A
& M Consolidated Independent School District v. City of Bryan,
184 S.W.2d 914, 915-16 (Tex. 1945). See also City of Beaumont v.
Fertitta, 415 S.W.2d 902, 915 (Tex. 1967) (Walker, J.,
dissenting); Galveston Wharf Company v. City of Galveston, 63
Tex. 14 (1884); Cf. Santa Rosa Infirmary v. City of San Antonio,
259 S.W. 926 (Tex. Comm'n App. 1933); City of Dallas v. Smith,
107 S.W.2d 872 (Tex. 1937); City of Palestine v. Missouri-Pacific
Lines Hospital Association, 99 S.W.2d 311 (Tex. Civ. App.--
Amarillo 1936, writ ref'd) (cases involved not political
subdivisions but rather institutions of purely public charity).

Our inquiry, however, does not end here. In your letter
requesting our opinion you state: 'Offices would be leased
and/or office space would be sold on a 'condominium theory' to
doctors including specialists who would also be using the
hospital facility for the care and treatment of their patients.'
The office space leased or sold to doctors would then be subject
to private use and control. We must first address the issue
whether public property not used for public purposes or not used
exclusively for public purposes will be denied tax- exempt status
by virtue thereof.

It has been suggested that Fertitta is controlling. This case
held that property owned by the city, though leased to private
persons for the purpose of carrying on a private commercial
enterprise, was exempt from ad valorem taxation regardless of the
fact that the use to which the property was put was not public.

The court in Fertitta departed from the method of
constitutional analysis which courts had traditionally invoked
when the issue was whether property owned by a political
subdivision was entitled to receive tax-exempt status. City of
Beaumont v. Fertitta, supra (see dissenting opinion). Prior to
Fertitta, courts had always looked to whether the property was
owned by a political subdivision and whether it was used or held
for a public purpose, while assuming that, if it were not so
used, it would be taxable under article VIII, sections 1 and 2 of
the Texas Constitution. See A & M Consolidated Independent
School District v. City of Bryan, supra; Daugherty v. Thompson, 9
S.W. 99 (Tex. 1888); City of Abilene v. State, 113 S.W.2d 631
(Tex. Civ. App.-- Eastland 1937, writ dism'd) (holding
disapproved of on other grounds in Fertitta). The court in
Fertitta departed from the traditional mode of constitutional
analysis in declaring that the constitution does not require that
property owned by a municipality but not used for a public
purpose be taxed. It only requires that private property held by
natural persons or private corporations be taxed. Therefore,
since the constitution does not require municipal property to be
taxed, the legislature needs no constitutional authority to
exempt it. It chose to do so in the now-repealed article 7145,
V.T.C.S. This statute required that all property, except that
which is expressly exempted, be taxed. The now-repealed article
7150, V.T.C.S., exempted '[a]ll property, whether real or
personal, belonging exclusively to this State, or any political
subdivision thereof, or the United States. . . .' Public
ownership was enough, no public use was required.

The dissent in Fertitta readily pointed out that this
constitutional and statutory argument is novel; indeed, earlier
decisions which went to great length discussing the holding and
using requirements of public property make sense only if one
accepts the claim that the constitution requires all property to
be taxed unless it is specifically exempted pursuant to a
constitutional provision, that public property, in order that it
be deemed tax-exempt, must fall within the limitations set forth
in article VIII, section 2 or article XI, section 9 of the Texas
Constitution. No other case has explicitly employed such an
analysis. Moreover, the Texas Supreme Court clearly narrowed the
reach of Fertitta in Leander Independent School District v. Cedar
Park Water Supply Corporation, 479 S.W.2d 908, 911 (Tex. 1972)
and in Satterlee v. Gulf Coast Waste Disposal Authority, 576
S.W.2d 773 (Tex. 1978).

Leander did not concern property owned by a political
subdivision leased to a private person for the purpose of a
private commercial enterprise; rather, it concerned property
owned by a private person but used for public purposes. In
overturning a lower court judgment sustaining the tax-exempt
status of such property, the court specifically held that
property, to be exempt, must be used for public purposes. The
court in Leander did not, however, explicitly reject the mode of
constitutional analysis employed in Fertitta. In Satterlee, the
court reaffirmed the requirement that there be a public use
before property owned by a political subdivision be declared tax-exempt.

If the traditional method of analysis were applied to the
instant situation, a court would find that since the property of
the political subdivision is used for private purposes, it should
not receive tax-exempt status. If the method of analysis
employed in Fertitta were employed instead, a court would also
find that the property should not receive tax-exempt status. In
Fertitta, the court looked to the now-repealed article 7150,
V.T.C.S., which did not require that property owned by a
political subdivision be used for public purposes in order that
it be tax-exempt; mere public ownership was enough. However, the
statute which replaced article 7150, V.T.C.S., section 11.11(a)
of the Property Tax Code does require that property owned by a
political subdivision be exempt from ad valorem taxation only if
it is used for public purposes. Therefore, regardless of which
method of analysis a court would employ, it is clear that a
requirement that the property be used for public purposes would
be imposed. The final issue is whether that public use must be
exclusive or whether a private person may permissibly be
incidentally benefitted.

In Satterlee, the court declared to be taxable real property
which was conveyed to a political subdivision. The court held
that the instruments did not convey interest in the property
sufficient to make the ownership 'public' for purposes of article
VIII, sections 1 and 2. On motion for rehearing, the waste
disposal authority urged that the property still be held tax-exempt under that provision of article XI, section 9 which
purports to exempt '. . . all other property devoted exclusively
to the use and benefit of the public. . . .' The court disagreed
and, citing Lower Colorado River Authority and Daugherty,
declared that the property must be held only for public purposes
and devoted exclusively to the use and benefit of the public. On
the basis of this language, we conclude that, by the arrangement
here contemplated, the property would lose its tax exempt status
because it is not used exclusively for the benefit of the public.

With respect to office space which the authority proposes to
sell 'on a 'condominium theory" to doctors, the foregoing
argument is relevant. There is, moreover, an additional
argument. Both article VIII, section 2 and article XI section 9
of the Texas Constitution speak of property owned by a political
subdivision. Even if office space which was sold as condominiums
were to meet the 'public use' test, it is highly unlikely that it
would meet the ownership test. In Calvert v. Harris County Water
Control and Improvement District No. 58, 368 S.W.2d 833 (Tex.
Civ. App.--Austin 1963, writ ref'd n.r.e.), the court held that a
special district was not, within the meaning of article VIII,
sections 1 and 2 of the Texas Constitution, the owner of what had
been a privately-owned water supply system. The special district
was not empowered to exercise any control over disposition of the
property of the system, though legal title to the property vested
in the district; the control was vested in a trustee created by
private individuals, and for their benefit. In Satterlee, the
Texas Supreme Court held that a state conservation and
reclamation district did not acquire exclusive ownership of
property on which an industrial waste treatment center was
constructed where the special warranty deed conveyed the property
to the district only for 'so long as' the property was used for
industrial waste treatment and restricted the ability of the
district to subsequently convey such property. The supreme court
held that such a conveyance created a determinable fee, that
exclusive ownership and control of the property had not vested in
the district, and that the property was not exempt from ad
valorem taxation. Though no Texas court has yet explicitly so
held, we conclude that a court would probably declare that, in
the event that a political subdivision sold office space as a
condominium, the political subdivision would no longer 'own' the
property in the sense required by article VIII, section 2 or
article XI, section 9 of the Texas Constitution, regardless of
the use of such office space.

SUMMARY

The mere fact that a charge is made for the use of property
owned by a political subdivision or a profit is generated thereby
will not cause such property to be denied ad valorem tax-exempt
status. Property owned by a political subdivision, but leased to
a private person for the purpose of engaging in a private
commercial enterprise, would not be entitled to exemption from ad
valorem taxation under article VIII, section 2 or article XI,
section 9 of the Texas Constitution. Property owned by a
political subdivision, but sold as a condominium to a private
person, would not be entitled to exemption from ad valorem
taxation, regardless of the use of such property, because it is
not 'owned' by a political subdivision within the meaning of
article VIII, section 2 or article XI, section 9 of the Texas
Constitution.